Mellanox Technologies: How Low Can It Go?

"We see Intel as the primary competition, and we're very concerned. For us, the game plan is to stay ahead of Intel. Today, we are leading by a generation." - Yakov Shulman, CFO, Mellanox Technologies

The semiconductor industry is rife with boom and bust cycles. There are anomalies like Intel (INTC) in the mid 80's to late 90's, or Qualcomm (QCOM) in the iPhone (AAPL) era, but for the most part, it's feast or famine. Exhibit A is a two year chart for Mellanox Technologies (MLNX), a fabless semiconductor company that designs, manufactures and sells high-performance interconnect products that help to facilitate data transmission between servers, storage and systems.

(Chart Source: Yahoo Finance)

There's an old Wall Street chestnut that says an investor shouldn't catch a falling knife, but after a drop from $120 to $34.50, I purchased some shares a shade under $35. If we rewind to 2102, the company earned $3.57/share when it shot up to $120. For 2013, that figure declined to an estimated consensus of $1.17, which accounts for the sell off. However, if we fast forward to 2014, average earnings/share estimate is for $2.22. At $35, that gives us a forward P/E of 16. I find that metric reasonable, and will continue to dollar cost average, even if the price keeps falling.

This really isn't just an article about Mellanox Technologies, but the brewing battle between Mellanox and Intel for supremacy in the data center. I'm betting on Mellanox. To buttress my investment thesis, the entirety of this article is helped by the most recent Mellanox Technologies 10-K, its last conference call, and the presentation at the Barclays Global Technology, Media and Telecommunications Conference.

A Brief Company Background

It's all about Big Data. Mellanox Technologies allows seamless integration between servers and the end users with their insatiable appetites for all sorts of information. It's the only game in town for 56 gigabit per second InfiniBand products. InfiniBand is an industry-standard architecture that provides specifications for high-performance interconnects. According to the annual report, these high-performance interconnect solutions remove bottlenecks in communications between compute and storage resources through fast transfer of data, latency reduction, and improved central processing utilization.

Although the majority of the company's revenues come from InfiniBand (which they've been shipping since 2001), it's also an early supplier of 40 Gigabit Ethernet to the market. This provides Mellanox with the opportunity to gain additional share in the Ethernet arena as users upgrade from one or 10 Gigabit to 40 Gigabit. Both technologies are crucial in the Cloud, and Mellanox is a one stop shopping place for the digerati looking to make their data centers run at mind boggling speeds.

As far as customers go, Oracle (ORCL) (which owns 10% of the company) put Mellanox on the map by exclusively using the organization's InfiniBand offerings. Other heavy hitters followed suit. The enclosed diagram gives you a detailed presentation of Mellanox clientele:

(Diagram Provided By Mellanox Technologies)

In regards to marketing, the company primarily sells to large server OEMs such as IBM (IBM) and Hewlett-Packard (HPQ). Both entities represented 35% of revenues in Q1, 2013. In aggregate, OEMs constitute approximately 90% if its sales, with the remaining 10% coming from distribution. Enough said.

The Ensuing Battle With Intel

Where semiconductors for wireless handsets are concerned, it's common knowledge in investing circles that Intel is behind the eight ball. They're also a generation behind in InfiniBand and Ethernet solutions for Big Data transfers. Nevertheless, they're a formidable opponent with deep pockets for R&D and acquisitions. Intel recently circled the wagons by purchasing four companies to compete head to head with Mellanox. CFO Yakov Shulman at the Barclays Global Technology, Media and Telecommunications Conference:

• "Our closest competition is Intel. Intel acquired 4 companies to compete with us. Intel acquired NetEffect for Ethernet, they acquired Fulcrum for Ethernet switching, they acquired QLogic InfiniBand assets, as well as Cray Interconnect."
• "To date, Intel offers 40 gig solution on InfiniBand side. We hear that they decided to skip 56 gigabit per second generation and will try to intercept us at 100 gig."
• "We expect to introduce our full end-to-end 100 gigabit solution sometime in 2014, 2015 time frame. We think that Intel is behind us. We estimate that they will launch their solution in 2015 time frame."
• "For us, it's a matter of execution. I think we have better technology, and if we execute well, we could take significant market share."

The Mellanox Counterpunch

As part of its plan to deliver the next generation of interconnect, with speeds of 100Gb/s in 2014, 2015 timeframe, Mellanox acquired Kotura and IPtronics. These acquisitions bring to Mellanox important technology capabilities for interconnect solutions at 100Gb/s and beyond. By owning the core competency and controlling all the building blocks of the interconnect solution, Mellanox is positioned to continue to lead the fast interconnect market and to serve the High Performance Computing, Web 2.0, cloud, storage, database and financial applications.

Here's the Cliff Notes sales pitch as paraphrased by CEO Eyal Waldman in the latest conference call:

But even when Intel comes with a 100 gig solution, Mellanox has so many sticky design wins, it will take some time for Intel to really become a viable competitor in those markets. If you look at multiple design wins Mellanox has with Oracle, Teradata (TDC), IBM, and EMC, when Intel comes with their solution, these customers will have to rewrite some of the code they created around Mellanox products, and Mellanox would have to qualify the code.

Valuations

Comparing Mellanox Technologies to Intel is no apples to apples comparison. Besides the technology, the only thing the two companies have in common is that they both greatly underperformed a roaring stock market in 2013. Year to date, Intel has moved from $21 to $23.70. If you screened for a Dog Of The Dow, you'd probably unearth Intel. Mellanox is a pure play on the semiconductor market for Data Centers. Intel is a behemoth, with tentacles that reach into many markets.

If you're an investor looking for fixed income, Intel may be a good bet for you. The dividend yield is 3.8%, but the P/E Ratio is 13, with projected earnings growing at a paltry 7.5% for the next 3 years. I've been through three market crashes: 1987, 2000 and the "Great Recession" of 2008-2009. Because of the instability at times in the market, I prefer my fixed income in CDs. However, your comfort zone may be different. That said, I think Intel's days as a growth company are over.

With Mellanox, earnings are projected to grow 100% in 2014. Wall Street is a forward looking mechanism, and October is when the smart money starts crunching numbers for the next calendar year. Although there are headwinds in the market like a possible government shutdown, I'm wagering that Mellanox technologies has stopped falling. The short float is 13.5%, and with the next conference call scheduled for mid October, I'm betting on a short squeeze. This is a good investment for the next year.

Medidata Solutions: Priced For Perfection

"Medidata is uniquely positioned at the intersection of life sciences and technology." - Tarek Sherif, CEO Medidata Solutions

The best of both worlds. That's the enviable position Medidata Solutions (MDSO) finds itself in as we enter the Fall of a blistering year in the stock market. Two sectors that have outperformed are Cloud Computing and Biotech. Medidata's flagship product Medidata Rave sits solidly in the center of these two arenas. It offers cloud based solutions in the clinical trial process for biotechnology companies, medical device manufacturers, and big pharma.

The company had its IPO in June 2009 at $14/share. It barely budged from its initial share offering for two years as investors slowly waded back into the stock market. Once earnings and revenues increased at a healthy pace, investors took notice, and elevated the share price from $16 to $100 in 24 months.

(Chart Source: Yahoo Finance)

At par value, the equity sports a trailing twelve month P/E Ratio of 121. Although earnings growth for 2013 is a healthy 33%, the consensus estimate on Wall Street drops to 17.5% for 2014 (which may be conservative). My contention is that Medidata Solutions is ahead of itself, and may be due for a significant haircut if the next quarter doesn't live up to lofty expectations, or guidance disappoints. After all, Wall Street is looking for next year's numbers now.

To make my point, the remainder of this article will be liberally paraphrasing and quoting from the company's annual report, most recent conference call, and its presentation at the Morgan Stanley Technology, Media & Telecom Conference.

The Company Near Term

The Pharmaceutical Industry spends spends $90 billion a year developing new drugs, and Medidata Solutions is the largest task provider of solutions to the life sciences companies. According to the CEO, in its core market, it has over 50% market share, and has achieved "critical mass" in terms of the kind of data it's collecting. The company's chief competitors are Oracle (ORCL), Perceptive Informatics, and Tableau Software (DATA).

The annual report states primary product Medidata Rave is built on industry standards, enabling interoperability with legacy and third-party applications throughout the development process. CEO Sherif gives his spin:

We focus on replacing paper-based, Excel-based, and legacy-based processes in drug development in actual clinical trials with a very innovative disruptive technology solution that helps them to both save money, and to drive down times in drug development.

The company's software has end-to-end support for Unicode characters, required to deliver multi-lingual studies, which enabled its globally positioned sales force to land a who's who of pharmaceutical juggernauts. Johnson & Johnson (JNJ), Roche and AstraZeneca (AZN) are clients of note. Medidata can also boast a laundry list of biotechnology all-stars on its roster. The company's five largest customers accounted for 29%, 31% and 43% of Medidata revenues in 2012, 2011 and 2010, respectively. However, in 2012 and 2011, no single customer accounted for 10% or more of total sales.

Medidata is taking market share from some of the incumbents, or the legacy solutions. Last year, it added 100 new customers. It has 363 customers currently. There are over 2,000 companies globally that develop drugs. So there's a wide open field for it to continue to add new names.

It has a subscription model in terms of customers having the right to use Medidata technology for a period of time. It drives volume in terms of the adoption of the technology solutions, it recognizes revenue on a ratable basis over the contracts short-time, and its strategy is to drive adoption of the company's technology through its infrastructure, which is highly scalable on a gross margin basis.

The applications are very sticky. Last year, its retention was in the high-90% range, and that's not even counting the up sell opportunity it has with those customers. Last quarter, the retention rate rose to 99%.

Although this gestalt of information is impressive, it still doesn't warrant a trailing P/E Ratio of 120. However, as experienced investors understand, you are paying for future earnings growth. Medidata Solutions executives believe they are at the right place at the right time to take advantage of the paradigm shift in drug discovery.

The Company Long Term

Although trends in pharmacology such as Personalized Medicine, which includes genomics and targeted therapeutics, will likely be catalysts going forward, it is the expansion of Medidata's core competency that will drive share price higher. Recently, the company broadened its platform dramatically, and now focuses across the entire drug development spectrum. So from conception of a clinical trial through to completion of that trial. Last quarter, non-Rave revenues increased 144% year-over-year.

CEO Sherif:

We are able to increase market share across multiple functions within a single customer. As we identify new customer needs, our cloud model makes it much faster and more efficient to develop and deploy new functionality and solutions, continuously broadening and improving our platform and therefore, expanding our revenue opportunities.

Medidata is helping to define the vertical cloud business model, and its power is evident in its financial results. Not only did it exceed its previously stated outlook for revenue and EBITDA, and saw cash flow from operations increase to record levels, but it also continued to lead its SaaS peers in profitability measures. Second quarter highlights included:

• Application services grew 36% year-over-year.
• 45% of existing clients purchased more than one product, up from 41% in the first quarter.
• Total revenues for the second quarter of 2013 were $68.1 million, an increase of $14.6 million, or 27%, compared with $53.5 million in 2012.
• Application services backlog for the remainder of the year as of June 30, 2013, increased to $110 million, up 38% over the comparable period a year ago.
• Total cash, cash equivalents and marketable securities were $140.4 million at the end of the second quarter, an increase of $26.5 million, or 23%, as compared with $113.9 million at the end of the second quarter 2012.
• Cash flow from operations was a record $26.2 million in the second quarter, up 361% year-over-year.

No question is was an outstanding quarter, and I realize sell side Wall Street analysts are giving Medidata premium pricing, but I still remain convinced the stock is overvalued.

Conclusion

Medidata Solution's short float is only 5.5%, so the smart money is betting the stock has room to run. It keeps ascending to new highs on a daily basis, so short sellers beware. That said, its price/sales is 11, price/book is 16 and cash/share is only $1.45. That seems expensive to me. Young growth companies plow a lot of their revenues back into SG&A [Selling, General and Administrative Expenses] and R&D, and therefore, don't make a dime. That's not the case with Medidata. It's an extremely profitable and well run company, even with an R&D budget that's 19% of revenues.

Many investors subscribe to the Efficient Market Hypothesis where prices reflect all publicly available information, and that prices instantly change to reflect new public information. I take a different approach and believe that investors aren't always rational. Although the rank and file at Medidata are doing a great job where the company is concerned, in my opinion, the stock isn't worth $100, not at this juncture. I wouldn't short it. Personally, I don't short individual stocks, and that's especially true in a bull market.

Bottom line is I'd like to own this equity, but not at the lofty valuation. My purchase price for Medidata Solutions is somewhere between $65-$75. Its 200 day moving average is $64, and I prefer to buy my holdings for bargain basement prices. Your investment style may be different, and this stock has a full head of steam. If you don't mind the macro issues that hover over the stock market, this a great choice for short-term momentum players.

Stay Hungry

In most aspects of your life, it's best not to spread yourself too thin, but in investing, it's just the opposite. Diversification is the recommended plan of attack, and for the majority of retail investors, I would agree with that assessment. The original spider (SPY) (an ETF that tracks the S&P 500), is a terrific way to take advantage of a market that's running. It's the benchmark that professional portfolio managers judge themselves by. If you beat the S&P 500, you're outperforming the overall market, which at times is difficult to do as a stock picker.

For the past year and a half, I've been putting my investable assets in the technology sector. Most specifically, I bet on small cap companies that are levered to the smartphone and tablet markets. Hit a major cold streak for awhile. Both Velti (VELT) and Glu Mobile (GLUU) were big disappointments, but after a 30% gain in the portfolio the past six weeks, I'm gaining ground. A 110% rise in Facebook (FB) and a 75% profit in Synchronoss Technologies (SNCR) purged a lot of sins.

It's a given we're in another bull market, but nobody really knows how long the duration will be, and when the next significant correction will come. One theory I've heard, and one that I subscribe to, is that technology may be the place to be for the next three years. The technological change from legacy software systems to cloud based applications for the enterprise is one big area of growth. In addition, the explosion of wireless broadband for the corporation as well as the consumer is another. As automation engulfs us, companies are making the transition, and I want to take advantage of this evolution.

Nevertheless, technology companies can leapfrog each other in a heartbeat, and the losing companies can find significant erosion in market share, as well as share price in a nanosecond. A buy and hold strategy (a strategy I prefer), often doesn't work with small to medium sized organizations in the transformational era that we live. However, these smaller companies is where the growth is, so I've got some of the securities I own on a short leash.

I've recently sold some stocks because of very nice gains. We may be heading into a corrective phase with the government taper looming, plus, September is a historically bad month, and October is known for its market crashes. I want to have plenty of cash available to take advantage of a dip. If the market keeps running, there is always the upcoming earnings season, and promising companies may be on sale after an earnings miss. The remainder of this post will discuss some of the moves I've made the last two months, and the reasons for doing so.

Glu Mobile

A few months ago I liquidated my position in mobile gaming company Glu Mobile for $2.10/share. Although I sold half of my shares for a 40% gain when it traded at $5.90 in the Summer of 2012, I was underwater with my investment. This is because I loaded up on the company again when it dropped to $3. Besides the dip in price, one reason I jettisoned my stake is a lack of execution. Management has also recently changed their accounting practices, and the company has diluted shares by putting more on the open market. Although it rallied for awhile on a Microsoft (MSFT) buyout rumor, it can't seem to get off the mat.

This company has a lot of potential, and if they can monetize the multi-player gaming platform, it may get some price appreciation in the 4th quarter which is historically strong for Glu. They're also involved with mobile gambling in the United Kingdom which is another revenue generator. With my average price of $3.25, I thought Glu mobile could be a five or ten bagger if they started to execute. However, they seem to have dropped the ball this year after a nice 2012.

What this company needs is for a larger organization to throw investors a Hail Mary pass in the form of an acquisition. Although this is a distinct possibility, and they may have a good 4th quarter because of the Christmas selling season, I wasn't willing to wait. The dilution of shares, and change in accounting procedures were red flags. I wanted to give them till March to get their act together, but with the market running, decided to invest elsewhere.

Teradata

Data warehousing and analytics company Teradata was a short lived investment for the portfolio. I only owned the stock for six weeks, but made a 30% profit on a company that is growing at 13% a year. Double digit growth is very impressive, but the stock almost reached its consensus price target for the next 12 months in a month and a half. I bought at $48, it ran to $65, and I sold on the way back down at $62.

It was a toss-up whether to keep it or sell it because I bought Teradata at multi-year lows, and believe it has a bright future. This is especially true with new initiatives like Hadoop which may raise revenue growth. However, the Las Vegas over-under lines told me that the stock could go lower after a 30% gain, and a 15% growth rate. It dropped to $56 shortly after I sold it. With a forward P/E ratio of 21, it seems a bit expensive to me. I've got it on my watch list now.

Fusion-io

I held data accelerator Fusion-io (FIO) shorter than my position in Teradata - three weeks, or better put, 15 trading days. Again, I had a 30% gain in the equity. The stock got hyped up after a blistering IPO, and one blowout quarter when two of their hyper-scale clients, Facebook (FB) and Apple (AAPL), were buying Fusion-io products hand over fist. Clearly at $11, the stock was oversold, and that's when I purchased it. I like to bottom fish, especially with former high fliers when investor psychology goes in the opposite direction.

The stock is heavily shorted, and jumped 40% in two days after Pac Crest stated that $22-27 would be a good buyout price for the company. I wanted to keep Fusion-io, but needed to raise some cash for the possibility of an overall market correction. Thirty percent gain in three weeks is a tidy profit. Best-case scenario, the stock drops back below my purchase price of $11, and I will buy more shares. Worst-case scenario, the rumors drive the story line forward, and they get scooped up by a whale like IBM (IBM).

Facebook

Facebook is in my investing highlight reel - over 100% gain in a little over a year. There's always a bit of luck involved when you buy a stock near its 52 week low, but that's what happened when I bought the company at $19. Fifty percent off of the IPO price. In my last post, I said I thought it may double to $100 in twelve months, if not by Christmas, if they pull off another monster quarter, and the markets keep humming. I still believe that, and continue to consider the company a cornerstone in the portfolio.

On a personal note, I'm not a Facebook user. I utilize Twitter. Twitter is a great way to aggregate news all over the Internet. Twitter's recent announcement that they're going public has put some pressure on Facebook the last few days, but this will soon subside. The two technologies really compliment each other, although they compete for advertising dollars. Facebook is in the Investor's Business Daily top 50 stock picks. This is like performance enhancing drugs for an equity because it's where all the hot money flows. You've come a long way, baby.

Synchronoss Technologies

Another pillar in the portfolio, Synchronoss Technologies has been a workhorse for me, just like it is for telecommunications companies globally. Although 75% of sales are from smartphone activation, this will soon change because they are quickly becoming the cloud storage option for customers of clients like AT&T (T) and Verizon (VZ). This stock has all the essential ingredients to become like a Cisco (CSCO) or EMC (EMC) in their growth heyday back in the 1990's. Not that Synchronoss competes with Cisco or EMC, just in the price appreciation potential.

Wells Fargo believes the company can beat Wall Street's expectations, and grow 23% for the next three years. I agree with them. The stock is a bit pricey now, but it's had a terrific run. One thing to consider with Synchronoss is that they are not one of these sexy technology stocks. They do all of the heavy lifting for the telecommunications carriers. Back in the 90's I invested in Internet infrastructure plays, not the dot coms, and did quite well. I continue the same tack as Web 2.0 builds out.

Nuance Communications

Although I bought Nuance for their superior voice recognition technology, I'm waiting to see what Carl Icahn does with his 17% stake in the company. Icahn also has a stake in Apple, so speculation is that he will push for an acquisition. I really thought all the headline grabbing news concerning Icahn and Nuance would push shares higher, but that hasn't been the case. I expect a 15% return from Nuance per year from my purchase price of roughly $19, a multiyear low for the company.

Allot Communications

Israeli based Allot Communications (ALLT) is slightly above my purchase price of $12. This is a short term holding unless they can provide guidance. The company is currently under pressure from a numbers miss last quarter, and many Israeli based stocks are feeling the pain of a civil war in Syria. I'm giving Allot two quarters to produce better numbers. Company executives believe that telecommunications spending in Europe and China is picking up, which could boost revenues. This is another wireless broadband infrastructure play.

Ruckus Wireless

Ruckus Wireless (RKUS) is a recent IPO. At $16.50, it trades about $3 above the public offering price, and about $3 above my average cost per share. The company provides the infrastructure for WiFi hotspots, both in the enterprise and with telecommunications carriers. Nokia-Seimens is a large partner, and the equity has rallied on rumors of an acquisition by the larger company. Cisco is a big competitor, but many telecommunications carriers prefer duo vendors. I like their prospects even without being bought out.

Conclusion

The concentrated portfolio only holds five stocks right now, plus the cash I've raised from selling Fusion-io. This is a dangerous strategy, especially if technology securities go into a funk. Nevertheless, my perspective is that we're in a three-five year window of opportunity for investors with the buildup of wireless broadband and cloud infrastructure. I'm willing to take my chances.

However, after living through the crashes of 1987, 2000, and the most recent "Great Recession", I'm still skeptical of Wall Street. I do my own research because I remain confounded by the sell side research houses, and their vested interests with the companies they cover. I'm not suggesting all sell side research is bad, in fact it's just the opposite. If you need a blueprint for a particularly difficult company to understand, the professionals do it very well. I just take it with a grain of salt because you just don't know who they're in bed with.

Once Bitten, Twice Shy - Impressions Of The Mobile Advertising Market

In March, eMarketer published the enclosed chart for their projections on the mobile advertising market:

At the time I was overweight in my portfolio with Velti (VELT), who at that juncture was the leading independent global mobile advertising exchange. I believed owning shares of Velti was like walking into Fort Knox with a government issued withdrawal slip - like a winning ticket for supermarket sweepstakes. With the growth that eMarketer extrapolated, all I would have to do was wait a few quarters, and I could make a nice percentage on my original investment. This one was going to give me a run for the money.

I sold my entire position in Velti at $2.35/share only a few days after the publication of these statistics for a whopping loss. It was another bad quarter in a year of bad quarters for the company. I cringe when I look at the decrease in my portfolio. Velti now trades for thirty-five cents a share. In fact, they are currently being scrutinized by two law firms for a possible class action suit for securities fraud. It's like Global Crossing or WorldCom all over again.

That said, I don't want to fall asleep on the mobile advertising industry. The chart eMarketer offered says it all - $27 billion in ad sales by 2017 by their calculations. It's a huge growth story in the overall advertising spectrum. Velti may have come up short, but there are plenty of other companies that compete in the space.

The fate of a company like Velti may have put the kibosh on other small, independent mobile advertising networks in the eyes of the AdAge 100. These conglomerates don't want some fly-by-night operator handling their marketing on handheld devices. Far from it. The only publicly traded independent on the major exchanges that excels in mobile marketing is Millennial Media (MM). They can boast of 85% of the AdAge 100 as clients, although they have less than 1% market share.

The chart below was released by eMarketer last week, and is an eye opener if you are investing in the sector:

Google's (GOOG) growth from 2012-2013 remains relatively flat, although they do a lion's share of the business with AdMob. Apple's (AAPL) iAd isn't included in the chart, but they command about an 2.3% market share according to 2012 statistics by eMarketer. Millennial Media has less than 1% of the pie, and their growth is in decline as a function of overall industry share. Facebook (FB) tripled its business this past year, and is the dark horse at #2.

Facebook

The big knock on Facebook is that it is overvalued. Perhaps that's true, but you could say the same for Amazon (AMZN), Tesla (TSLA), and Netflix (NFLX), and they keep pushing through the stratosphere. My original post on Facebook was back in late August of 2012, and I specifically stated I was buying the stock at $19. People thought I was crazy because the security was "overvalued".

This company is a full fledged dreadnought. I believe it will see $100/share in the next twelve months, if not by Christmas, if they produce another stellar quarter. Right now it sits at #15 in the Investor's Business Daily top 50 stocks. This is where the hot money goes, all the momentum players. Facebook currently trades at $44/share, and the high estimate on Wall Street is $55 by SunTrust. When Facebook eclipses analyst predictions, the sell side players will up their estimates, which will push the stock even higher. It's a vicious cycle, but it happens quite frequently.

There are a lot of catalysts to propel the equity higher. Most importantly is the possibility of inclusion in the S&P 500 during the next year. If this comes to fruition, many mutual funds would forced to buy the company. Next would be window dressing at the beginning of next quarter by fund mangers if the stock keeps churning and burning. Lastly, the monetization of Instagram would add incremental dollars to an already fat bottom line.

Although this is a big company in regards to market capitalization, there is still plenty of room to grow. They're currently a $100 billion organization, #33 in the United States, but that pales in comparison to competitors like Google and Apple.

Google

Where technology is concerned, you can't go wrong with Google. They were a category killer from the get go when they made Boolean searches on search engines like Alta Vista and Northern Lights obsolete. They continue to trounce Apple in global market share with the Android operating system in the smartphone wars. If eMarketer is correct, the company commands an enviable lead in mobile advertising. However, they are a mature company with a large market cap.

As of September 2nd, Google has the #3 market capitalization for all U.S. equities at $282 billion. In addition, they don't pay a dividend. Consensus analyst estimates for earnings growth as reported on Yahoo Finance is 9.4% for this year, but levitates to 17.5% for 2014. Let's just say they are going to be growing at 15% per year (that's the five year consensus), for demonstration purposes. At their current price of $880, that would give you a share price in about a year's time of roughly $1,050 give or take a few dollars. A nice gain if they meet those projections.

My experience has been that most companies get about a ten year window to produce significant growth. Google certainly fits that bill. They may also buck conventional wisdom by continuing to expand for the next five years. We are in the wireless broadband revolution, and they are a kingpin. However, the law of large numbers may catch up to them, much the same way that Apple experienced last year. Even with Google's highly regarded AdMob service, I'd be more inclined to invest with them if they paid a sizable dividend.

Apple

I'm not like Rain Man or Mr. Know It All when it comes to the granular technological aspects of Apple's iAd service, but it would appear to me that their mobile advertising division is top shelf if it's anything like their handheld product lineup. Like Google, Apple needs little introduction, but they do pay a dividend, 2.5% which is very good for a technology stock. In the United States, the company is numero uno in market capitalization. $442 billion dollars was the tally on September 2nd. $50 billion more than Exxon Mobil (XOM) which comes in at #2.

From my perspective, the large market cap is the big problem growth investors may have with investing in a company like Apple in regards to their advertising network. The equity trades for $500/share, and has had a terrific run since the introduction of the iPod. However, when we break down the consensus numbers as reported on Yahoo Finance, we get earnings growth of only 8.3% for 2014, although the five year projection is for 20% expansion annually on average. Like Google, you have an opportunity to make money with this stock, but Apple pays the dividend.

Millennial Media

Millennial Media is fairly new to the public domain, and hasn't fared too well since their IPO a little over a year ago. Millennial's 52 week range is $16/share at the high point, and $6 at the low, right about where it trades today. In 2011, they commanded 1% of the overall mobile advertising market, but that has descended each of the past two years to 0.82% last year, and 0.72% currently. Although they're growing because the overall sector is growing, they are still losing market share which may have contributed to the price decline.

The company sports reasonable valuations: Price/Sales 2.3, Price/Book 3.29, Cash/Share $1.51. However, I believe this stock can go lower, and wouldn't pay anything above $3-$4 for it. As impressed as I was with the Barclays Internet Connect Conference presentation in March, circumstances have changed for the company. Most specifically, Millennial's recent acquisition of Jumptap. CEO Paul Palmieri sheds some light on the recent acquisition in the most recent conference call:

Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC.

This combination of companies makes for a formidable competitor, at least stateside. About 80% of Millennial's revenues this past year were domestic. There is plenty of opportunities internationally. However, Millennial Media and Jumptap still have to assimilate the two organizations which will take some time. Millennial also missed on revenue projections last quarter. It wasn't much, 47% realized as opposed to 50% projected, but it was a miss nonetheless.

Conclusion

Although Velti left me on the hook, I still believe there is plenty of money to be made in the mobile advertising space. All four companies I've discussed do have significant growth, some better than others. The Wall Street Journal reported this weekend that Apple will be doing business with China Mobile (CHL), so that may move the stock in the short run despite the possibilities of margin pressure. Google is another good one if you like mega-cap companies.

That said, with a sector that is in hyper-growth, I prefer to go with the momentum players. My preference is Facebook. Unless Sheryl Sandberg resigns, the stock may keep on running despite the always present obstacle of insider selling, most specifically by founder Mark Zuckerberg. I've had Millennial Media on my watch list for six months now, and it does nothing but go lower, despite the 47% revenue growth. I'm going to continue to monitor it, but after my experience with Velti, they're going to have to show me they can execute their numbers.

Allot Communications: Lumpy Earnings Mean A Bumpy Ride For Investors

"We are now playing in the big rules game and the big guys game." - Rami Hadar, CEO of Allot Communications

In late April, Infonetics Research published a paper proclaiming Allot Communications (ALLT) the 2012 overall market share leader in Deep Packet Inspection [DPI]. DPI-based solutions identify and leverage the business intelligence in data networks, allowing operators to capitalize on the network traffic they generate. Service provider DPI product revenue totaled $596 million worldwide in 2012. Allot got about $100 million of that market. Infonetics attributed the company's advance to increased sales in the Americas, and boosted revenues from APAC.

According to the report, Allot pulled ahead of Sandvine (SNVNF) to take the overall DPI revenue market share pole position. This was Allot's first time as leader in the space. System integrators Cisco (CSCO), Ericsson (ERIC), and Oracle (ORCL) (with their recent acquisition of Acme Packet), also compete in this field. However, it's stand-alone Allot that topped the wireless DPI segment, while Sandvine is number one in fixed-line DPI. Fixed-line DPI is a more mature market which diminishes growth. If Allot can maintain their advantage in wireless, they could experience double digit gains going forward. The wireless DPI sector is projected to grow at a CAGR of 33% to 2017.

This glowing news did nothing for Allot's stock price. Because of belt tightening with Tier 1 telecom service carriers, Allot has missed their numbers for a few quarters. They now trade at $12/share, near the bottom end of their 52 week range of $11-$30. Lackluster earnings reports, an overall decline in the markets (August was the worst month since May of 2012 for the S&P 500), and an expansion of Allot's core competency, has put the share price under tremendous pressure.

(click to enlarge)

(Chart Source - Yahoo Finance)

I recently took a position in the company because of their reasonable valuation and superior technology. Nevertheless, I've got them on a short leash. After reading the May 7th, Q1 conference call transcript, and the August 6th, Q2 conference call transcript, I have decided to make Allot Communications a short term investment. I believe the stars are aligned to see a nice pop in the equity's price in the next six months. However, if they begin to give guidance, I would reconsider my position for a longer duration. As is, they only provide qualitative information, and as far as numbers are concerned, they only state the book to bill ratio.

The book to bill ratio is the ratio of orders received to units shipped and billed for a specified period. In Allot's circumstance, it's for each quarter. In the latter half of 2012, and the early part of 2013, the company had a book to bill ratio less than one. In the past two quarters it was over one. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. You can see why the equity sold off this year if you utilize this metric. You can also wonder why the security didn't rise with the book to bill at one plus.

In Q1, Allot had the first sequential decline in top line revenue after 15 quarters of consecutive growth. The primary cause for the sequential decrease in revenues was the softness felt in EMEA [Europe, Middle East, Asia] during the second half of 2012. The revenue decline also resulted from normal first quarter seasonality. This softness in EMEA still hounded the company in Q2. A $5 million deal with an EMEA Tier 1 fixed-line operator, has been delivered however, revenue recognition has been delayed to the second half of 2013.

However, business didn't stand still for the company. As they stated in their press release concerning quarterly achievements:

• During the quarter, large orders were received from 13 service providers, 3 of which were new customers. (Typically, 60% to 80% of revenue comes from follow-on orders from existing customers. 40% - 20% comes from new clients)
• Six of the large orders came from mobile-service providers, two of which were new customers.
• Secured orders from three of the world's top ten telecommunication operators to assist in their LTE network rollouts.
• Cash, cash equivalents, short-term deposits and marketable securities totaled $134.7 million with no debt.
• VAS [Value Added Services] accounted for 26% of total bookings.

The last bullet point highlighting Value Added Services is a key selling point for Allot when they market their products to the Tier 1 telecom companies. Management believes this is a tremendous growth opportunity going forward. This can be illustrated by the fact overall revenue in VAS went from 15% - 20% in 2012, to 26% in the most recent quarter.

As data usage over mobile networks continues to rise, operators are adopting solutions that not only manage the increased traffic, but include specialized capabilities like video optimization, content caching, and usage-based billing.

CEO Rami Hadar in the most recent quarter:

In terms of the product leadership, I believe that we have a very strong product in terms of scalability, on one hand and also in terms of the features, on the other hand, which each one relates to an advantage versus our two other competitors. On top of that, we are quite unique in our Value-Added Services offering, and that's the key differentiator and sometimes it makes the whole difference in winning.

In Q1 he also discussed VAS:

After spending large part of 2012 executing cost-cutting and layoffs, some of the more advanced operators realized that they need to move past saving and into monetization and differentiation rather than cutthroat pricing competition. The strategies vary, but current trends around opting Value-Added Services, such as Parental Control; premium services such as high-quality video delivery; and early trials with application-based charging. We believe that the commercial success and rate of acceptance of these new offering by end users are important drivers for our future growth.

Currently, Parental Controls is the leading charge, but DDOS [Distributed Denial Of Service Attack] is also coming on strong. Enclosed is a chart spotlighting the potential revenue streams for Allot in Value Added Services.

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(This chart was obtained from an interview with Allot's AVP of Marketing Jonathon Gordon)

In addition, to buttress their leading position in the DPI sector, the company has expanded their product portfolio the last two years. This includes recent acquisitions of Ortiva Wireless and Oversi to enable Allot to offer integrated solutions. I think this is a key point because now Allot will compete with global video caching companies such as Akamai Technologies (AKAM), and Application Delivery Networks like F5 Networks (FFIV).

I believe that this transition from a stand-alone company to an integrator may be putting additional pressure on the equity as Wall Street waits and sees how well Allot does on a much larger stage. They are also an Israeli company and the conflict in Syria may have caused the security to sell off even more in the past two weeks with the world waiting to see what the United States' involvement will be. Nevertheless, Allot's lifeblood is DPI with the major telecom carriers, and I'm betting that delayed orders will be signed, sealed, delivered. They've got a long track record of selling to the telecommunications industry, and no longer have to evangelize their mission.

You can get really granular discussing the technology of some of these telecommunications companies, but it's the numbers that count. The short float is only 7.7%, so Wall Street seems to believe that shares may be adequately valued. Price/Sales is 4. Price/Book is 2.38. Cash/Share is $2.90. Not dirt cheap, but still very reasonable for a small cap technology firm with a fairly substantial track record and good prospects.

According to Yahoo Finance, consensus earnings estimates for 2013 is $0.15/share, but that figure jumps to $0.48/share for 2014. We're already in September and analysts begin looking to the next year's numbers in early Fall. Sales growth is projected to be 22% for 2014. That may prove to be a conservative extrapolation if integration initiatives begin to pan out. However, they will be going toe to toe in bake-offs with F5.

With only $100 million in annual revenue, this is a small company attempting to do battle with some formidable opponents. However, telecom carriers prefer Allot's DPI solutions, and could allow a more integrated approach if Value Added Services continue to pan out. I believe at $12/share, it's a decent bet for price appreciation going into the New Year.